Fed Warns of Dangerous Markets

In a study that could only be sanctioned by the independent (read unaccountable) Federal Reserve, the astute researchers at the Fed Bank of Chicago have come to the profound conclusion that faster and less transparent markets (aka high-frequency trading) pose dangers that aren’t properly appreciated. The investing public recognized the dubious role of high frequency trading about 2 hours after the 2010 flash crash. Leave it to the Fed to slam the barn door long after the horse has bolted.

Faster and less transparent markets pose risks that require more study, according to the Federal Reserve Bank of Chicago, which said high-speed trading may create dangers that aren’t properly appreciated or policed.

“One may also argue that the movement toward HST is part of a natural, evolutionary outcome within financial markets, not unlike the adoption of automated or computer-based systems in every other major industry,” Clark said. “Nevertheless, it is difficult to find examples of firms in other industries that were rapidly brought to the brink of bankruptcy due to technological malfunctions like the 40 minutes it took Knight Capital to lose $460 million.”

While market manipulation has always been a worry, it could be harder to spot today because high-speed firms “trade correlated products across multiple asset classes and trading venues around the world,” Clark said.

Jeremy Jones, CFA

Jeremy Jones, CFA is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Jeremy is a contributing editor of youngresearch.com.